"An annuity is a contract between you and an insurance company, which provides for periodic payments while you are living. Annuities are designed as long term investments to provide income over a period of years, and people often buy annuities to help manage their income in retirement," Commissioner Miller said. "Annuities should not be purchased to reach short term financial goals."
Commissioner Miller also released a new consumer guide on annuities. In the new guide, titled "The Do's and Don'ts of Annuities", Commissioner Miller notes consumers should understand when they purchase an annuity, their money is typically "locked up" for a specified time period, often five to ten years. If consumers want to withdraw above a specified amount of their money during this time, they will pay a penalty, called a "surrender charge". These surrender charges usually diminish the longer the money is in the annuity, until the product's full term is reached.
"Make sure you ask about the surrender charges, and before buying an annuity, decide whether you can afford to keep the money in the annuity for the entire surrender charge period," Commissioner Miller said.
The guide also details the three basic types of annuities. These are:
- Fixed annuities, which pay a guaranteed rate of return usually over a period of one to 15 years;
- Equity-indexed annuities, which pay a rate of return derived using an outside index, such as a stock market index, with a guaranteed floor;
- Variable annuities, which allow you to invest in a selection of portfolios, called sub-accounts, with these annuities increasing or decreasing in value, depending on the performance of these sub-accounts.
While annuities are designed as long term investments, there are immediate annuities, with payments beginning immediately on purchase, for someone who needs immediate income. Withdrawal above a certain amount of the investment may still be subject to surrender charges. Deferred annuities have payments beginning at a future date, often at retirement.
Because annuities are often used to provide retirement income, and marketed to seniors, consumers should be careful when buying these, and take advantage of the mandated free look period. The free look period is time consumers have, after buying an annuity, to review and understand the terms of the contract. During this time, consumers can decide to cancel the contract and get all their money back. Consumers should make sure they know deadline for the free look period when buying an annuity.
Commissioner Miller also urged consumers to avoid being pressured into buying anything on the spot, fall for other high pressure sales tactics, or feel obligated to buy because they got a free lunch, dinner, or other gift. The commissioner also said consumers should always verify the policy terms in writing, only work with an agent who provides his or her credentials, and only make a check out to the company issuing the annuity, not the agent.
"Annuities can help provide income over a long period of time, and can be part of a retirement income plan. But, consumers, especially seniors who will be depending on this income stream, should consult trusted family members or financial advisers, and get answers to all their questions, before making any purchases," Commissioner Miller said.
The "Do's and Don'ts of Annuities" and other consumer information on these products is available on the
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